Comprehensive Spending Review

Chancellor of the Exchequer, George Osborne, laid out the Government’s Comprehensive Spending Review recently. It was a strong performance, fuelled by a managerial competence for the brief.

We think it was predominately sound fiscal re-ordering, and will hopefully result in a tightening of the improved credit rating that the UK was already starting to benefit from. There were some interesting points: the fact that the DCMS (Department for Culture Media and Sport) has a budget reduced to £1.1Bn, questions whether it is viable as a separate budget holding Department of State. Also, small points emerge that can have significant effects on individuals: for instance, no longer will a single person below the age of 35 be able to claim housing benefit whilst living alone; they will be forced to share. Social engineering is no doubt a by product of this Spending Review, but nevertheless it does indicate a determination to put very firmly back into the hands of the individual, a sense of their own destiny and personal financial responsibility.

Importantly, Employment Support Allowance (the replacement for “Incapacity Benefit”) has been reduced to a maximum award of 12 months. This is a serious attempt to manoeuvre those who are able to work, back into the productive workforce.Transport is expecting an increase of £30Bn spending over the next 4 years, though, even at RPI + 3% from 2012, as a fare rise cap for rail fares, we doubt that commuters will be happy with what will in effect be the highest cost per mile of any rail system in Europe. More positively, the M25 is to be widened between 10 junctions (doesn’t yet state which ones), and in London, Crossrail is to proceed.

Politically, these cuts are hard fought for, with polls constantly showing the public’s contradictory desire to see both an improvement in the UK deficit, yet unwilling to bear the burden of cuts on their favoured services. These cuts are necessary and vital in restoring both fiscal rectitude and ensuring the country is on more secure footing in its return to growth. Government spending as a proportion of GDP has increased from 38% in 1997, when the Labour Party took power, to 45% in 2010. We feel this is an unsustainable level of public spending commitment.

Some headline points:

£900m to be spent on targeting tax evasion and fraud to target £7bn of tax losses

Code of practice for banks to be implemented from November 2011

Legislation on permanent levy on banks to follow

Four out of 15 banks signed up to the UK financial code of conduct

The government’s objective in taxing banks aims to extract maximum sustainable tax revenue from banks without driving them abroad

Higher-income taxpayers will contribute more to the deficit reduction plan both as a proportion of their income as well as in absolute terms

Reforms to criminal justice system to include cuts to Ministry of Justice budget to £7bn

Shortly, each Government department will publish a business plan setting out spending priorities so that they can be held to account

Ministry of Justice cost reductions of 6 per cent per year

Home Office spending to be cut by an average of 6 per cent a year

Prioritising counterintelligence spending in national and local police forces

Police spending to cut by 4 per cent a year until 2014-15

International Development budget up to £11.5bn by 2014/15

Savings of 24 per cent in the Foreign Office budget will be reached by cutting the number of Whitehall-based diplomats among other measures

Osborne confirms cut for defence forces at 8 per cent over length of spending review

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About Damian MerciarDamian Merciar is Managing Director of Merciar Business Consulting, http://www.merciar.com, a niche business economics consultancy founded in 1998. He has over twenty years experience in the areas of commercial Business Strategy. He is experienced in the transition environments of nationalized to private sector state utilities and the senior practice of commercial management, advisorial consultancy, and implementation. He has carried out policy advisory work for government ministries and been an adviser to institutional bodies proposing changes to government. He holds an MSc Economics from the University of Surrey’s leading Economics department and an MBA from the University of Kent. Also attending the leading University in the Middle East, studying International Relations and Language, for which he won a competitive international scholarship, and has a BA (Hons) in Economic History and Political Economy from the University of Portsmouth. He is currently based in London.